No rural idyll

China's country dwellers find it hard to scrape a living

WANG HONGBIN, the Communist Party chief of Nanjie village in the northern province of Henan, says he has few worries about China's entry to the WTO. His village is in the heart of the country's central plains, amid an endless expanse of wheat fields dotted with tiny villages. Farmers around here should be nervous about WTO entry: the price of their grain is 15-20% higher than in world markets. As China lowers its barriers to grain and other agricultural imports, wheat prices here are likely to drop. Most Chinese farmers have already endured four years of stagnating incomes. In the next few years, nearly 60% of peasants in Henan expect their incomes to fall or at best remain the same, according to a recent survey conducted by Chinese researchers.

James MilesNanjie put Mao on a pedestal

But Mr Wang's village is better prepared than many. Most of the 70m farmers in this province work on plots of land too small to benefit from mechanisation, but Nanjie has transformed itself from an impoverished rural backwater into an impressive-looking spread of factories and apartment blocks. Agriculture has been consigned to the sidelines as Nanjie has used village labour to make instant noodles, beer, packaging materials and a variety of other products.

The village owes its achievements to the collectivisation of its land, which has allowed it to redeploy surplus labour in industry. One of the biggest problems China will have to face in the coming years is finding jobs for at least 150m rural residents for whom there is little to do on the plots of land allocated to them (in Henan, under an acre per household). The OECD estimates that between 1997 and 2010, agricultural employment will fall by around 78m (only 3m more than if China had not joined the WTO). Reallocating this labour and using the land more profitably is essential to maintaining economic growth and social stability in the countryside.

Despite Nanjie's success, its approach is a non-starter for most peasants because land is the only form of social security they have. They have to pay for education and health care, and they get no pensions. They would agree to collectivising only if they could be confident they could earn money and provide for their old age by other means. Few are. Nanjie pulled it off partly because it is next to a county seat, so many villagers could work in the town.

The other reason is Nanjie's leadership. Many Chinese peasants despise the party secretaries assigned to every village, but in Nanjie Mr Wang is the subject of a personality cult rivalling that of Chairman Mao. Indeed, Mr Wang has adopted Maoism as the village ideology. A decade ago, he erected a 10-metre statue of the late chairman in the centre of the village, guarded round the clock by two militia guards armed with pistols. Schoolchildren in Nanjie learn Chairman Mao's essays by heart, and every household has a Mao statuette on display in the living room.

Chinese leaders recognise that farmers have had a rough time. In 1999, income from planting crops averaged $108 per farmer; in 2000, it dropped to $96, recovering only slightly to $99 last year. Average prices for agricultural produce in China are 20-40% higher than world prices, and supply far outstrips domestic demand, so prices are likely to fall. Boosting rural incomes—whether by moving farmers into industry or into more profitable agricultural production—is vital to ensure sustained economic growth.

Two decades ago, China decided to break up the Maoist “people's communes” and divide farmland into household plots. At the time it was a splendid idea, at last giving peasants an incentive to work. Both output and incomes soared. But now the countryside is left with a colossal burden: far too many people cultivating far too little land which they can neither sell nor mortgage. With two-thirds of China's population living in the countryside, including towns in rural areas, stagnating rural incomes make it harder for a consumer market to develop. Average rural incomes are only one-third those in urban areas.

Nanjie abandoned the household farming system five years after it was introduced in the village in 1981. Many of Nanjie's peasants had already left their land to work in the town. Mr Wang began by taking over two village factories (which he claimed had violated their contracts) and putting them under collective control. Two years later he called on villagers to surrender their individual land-use claims to the collective. In return they would get jobs in the factories and a monthly handout of flour. Since the land produced so little income, they duly obliged.

A model of its kind

Today Nanjie, with its 3,000 permanent residents and 10,000 contract workers, boasts an output value (unaudited) of around $160m. Visitors to Nanjie have only to look at some of the neighbouring villages, where there is little industry, houses are dilapidated and land is farmed in an inefficient patchwork of household plots, to realise that this is quite an achievement. But even Nanjie is now in trouble.

The problem is one that besets many of China's rural industries. Along the eastern seaboard, these developed rapidly from the mid-1980s to the mid-1990s (far less so in inland areas such as Henan). During this period, township and village enterprises were the biggest contributors to growth in employment and GDP and played a crucial rule in boosting rural incomes. By the end of 1996, they employed 135m people, contributing nearly half of China's exports, compared with one-sixth at the beginning of the decade. But since then they have gone into decline.

Last year, rural enterprises increased their value-added by 8%, but their number fell by 620,000 and employment was down 5m on the 1996 peak. And opportunities for peasants are becoming harder to find: half of those who get new jobs in rural enterprises are workers laid off from urban areas.

Why this decline in what was once the most promising sector of the Chinese economy? One reason is the sharp devaluation of other Asian currencies during the region's financial crisis of 1997, which has made the enterprises' exports less competitive. Another is the credit crunch brought about by China's efforts to reduce non-performing loans in the banking system. In 1997, township and village enterprises accounted for 6.7% of bank loans, already absurdly low given their importance to the economy. By 2001, their share had declined to 5.7%.

A more fundamental problem has been the way these enterprises are run. Many were, in effect, under the control of township and village governments (euphemistically described as “collective ownership”), resulting in poor management and irrational investment decisions. Many of these have now been privatised, but the private sector in China is especially starved of capital.

Nanjie's problems are potentially greater than most. It truly is a collective, with the village providing free housing, schooling, health care and food for all its permanent residents. Yet in the past five years, output value has declined by 19%, and the future looks bleak. Income from tourists keen to study its social and economic model or savour its Maoist revivalism is probably a main lifeline. According to one of Mr Wang's aides, some 300,000 people visit every year.

Noodles, noodles everywhere

Increasingly fierce competition has hit Nanjie hard. Taiwanese noodle manufacturers have rapidly expanded their market share in China, and small-scale beer production has proliferated across Henan. As a diversified conglomerate, Nanjie has been able to cross-subsidise the losses suffered by its beer and noodle factories from more profitable enterprises such as colour printing, condiments and packing materials. And thanks to generous support from higher-level government, Nanjie has been able to increase its borrowing from $60m three years ago to over $97m now. But fierce price competition has sucked Nanjie into a dispute with rival beer producers that has undermined its squeaky-clean, model-village image.

Nanjie's proximity to a town and to a major highway through the province will help it survive. But many small and isolated rural enterprises will be unable to compete as larger-scale private businesses develop in urban areas. WTO entry will help boost some exports that could absorb rural labour, including fruit and vegetables, clothing and textiles. But these new opportunities will be relatively small, and they could disappear again if China's key export markets, such as America and Japan, impose safeguards to protect their own industries from Chinese exports.

Even in the highly unlikely event that China's debt-plagued banks were to extend more credit to rural businesses, this would solve only part of the problem. Despite privatisation, government interference remains a heavy burden. Reforms to the tax system in 1994 gave the central government a bigger share of tax revenue and left many township and village governments close to bankruptcy. Many rural governments now depend on indiscriminate, often illegal, levies on businesses and households to pay the salaries of officials and sustain basic services such as education and health care.

Taxes on enterprises are low in China compared with many other developing countries. But in the countryside, ad-hoc fees often consume 20% of post-tax profits, far more than the taxes themselves. Such fees are also heaped upon individual farmers, who end up paying a higher proportion of their incomes in fees and taxes than do urban residents. Government efforts to stop this practice have met with limited success. The plan is to replace all fees with a uniform tax, but this has encountered strong resistance among rural governments, which are worried about losing even more of their revenue.

The result is growing rural discontent, with ever more frequent outbreaks of unrest. “More and more peasants are submitting petitions concerning the excessive burden [of fees and taxes], and conflicts [between officials and peasants] are becoming increasingly intense,” said an unusually frank report on causes of social instability in China published by the Communist Party last year. Rural unrest worries the government, but not as much as urban unrest because it is easier to suppress without drawing unwanted attention. Although party rhetoric stresses the importance of rural stability, urban centres will continue to attract a bigger share of the central government's resources.

Ultimately, China's surplus rural workers will need to move into urban areas. But the government, fearful of creating its own versions of Mumbai with endless shanty-town sprawls, is hesitant to open the doors to peasant migration. Where restrictions have recently been lifted, it has been mainly in smaller cities. Many peasants work in large cities illegally, but they are denied education for their children, health care and pension benefits. They cannot buy housing, and remain dependant on village land for security in their old age. The system does not prevent the migration needed to ensure a continuing supply of cheap labour, but it is very unfair. No wonder that nearly 80% of peasants in the Henan survey said they were dissatisfied. But would they be any happier in the cities?